Pressures are already building on the financial stability front that will make the next economic downturn messier than anticipated.” – Bill Dudley, former President of the NY Fed
I get irritated when I see mainstream media and alternative mainstream media parroting the propaganda used to cover up the truth. This morning Zerohedge echo’d the “corporate tax payments liquidity squeeze” narrative first used back in September to justify the re-start of the repo QE program. I would have thought that idiotic excuse would have been proved wrong after this:
It’s truly amazing that Fed officials come clean after they leave their post at the Federal Reserve. We’ve seen this dynamic for sure with Greenspan. Not so much with Bernanke, but I always considered Bernanke to be a bad liar and it seems that he’s chosen largely to fade from public exposure. Ditto with Janet Yellen.
Bill Dudley, however, is a former partner of Goldman Sachs and thus highly intelligent (as is Greenspan – Bernanke and Yellen not so much). Dudley clearly sees the writing on the wall. Now that he’s not in a position at Goldman in which it’s advantageous for him to promote stocks in exchange for big bonuses, or at the Fed where it’s politically correct to rationalize a bullish narrative (“Fed-speak”), he’s coming “clean” per the quote at the top.
The Fed’s current posture, based on the Fed officials’ weekly speeches ad nauseum, is that the economy is healthy with moderate growth and a strong labor market. If this is the case, however, why is the Fed printing money on a monthly basis in an amount that is close to the peak monthly “QE” after the financial crisis?
The question, of course, is strictly rhetorical. In fact the Fed once again quietly increased the amount of money it is printing and handing over to the banks. On November 25th the Fed released an updated repo operation schedule which showed additional repo operations totaling at least $50 billion. The Fed has also made its website less user-friendly in terms of tracking the total amount by which the repo operations have increased since the first operation in mid-September.
The 28-day repo QE for $25 billion that was added to the program Nov 14th was nearly 2x oversubscribed this morning, which means the original $25 billion deemed adequate 3 weeks ago was not nearly enough – a clear indicator the problems in the banking system are escalating at a rate faster than the Fed’s money printing operation. Just wait until huge jump in subprime quality credit card debt that will be used to fund holiday shopping begins to default in the first half of 2020…
The chart above shows the Fed’s repo schedule posted on September 23rd on top and the latest repo operation schedule on the bottom. I suspect this won’t be the last time the Fed will increase the amount of its “not QE” QE money printing. Additionally, the Fed refuses to identify the specific banks which are receiving most of the repo money. One obvious recipient is Deutsche Bank, which is quietly shutting down a large portion of its business operations and is likely technically insolvent. Per a 2016 IMF report, DB is highly interconnected to all of the Too Big To Fail banks (JPM, GS, C etc). This means inter-bank loans and derivatives counterparty exposure, among other financial connections. Aside from the DB factor, as I detailed last week with deteriorating leveraged loan/CLO assets held by banks, I am convinced that the “repo” money is needed to help banks shore up their liquidity as loans and other assets begin to melt-down. This is quite similar to 2008.
For more insight into the truth underlying the Fed’s renewed money printing operations, spend some time perusing articles like this from Wall Street On Parade.